Patxi’s Wrist Slapped for Pocketing Healthy S.F. Funds [Updated]

You may recall the controversy that began in September 2011 when the Wall Street Journal ran an exposé about how several large San Francisco restaurants were using a loophole in the city’s health care ordinance to charge customers that Healthy S.F. surcharge and then never use the funds as they’re meant to be used, for health care. The latest chapter, as the Chron reports, is that City Attorney Dennis Herrera decided to make an example of one local restaurant chain that was guilty of pocketing these funds, and that chain is Patxi’s Chicago Pizza. The company has agreed to a settlement in which they will pay out $320,000, $200,000 of which will be distributed among 115 current and former employees who were guaranteed health care but didn’t receive it.

The ordinance was passed in 2006 and quickly drew the ire of the restaurant community who said that it would unfairly increase the cost of doing business in a city which already has the highest minimum wage and most generous policy regarding sick days in the nation. The law only required that restaurants and other businesses create reimbursement accounts for health care, and many of them did not make their employees — especially non-English-speaking staff — aware that the funds existed, or make them easily accessible.

In 2011 and 2012, a broad investigation revealed that many restaurants were collecting surcharges from customers, setting them “aside” for health care purposes, and then pocketing the majority of them at the end of the year because employees hadn’t used them. In their defense, One Market owner Michael Dellar argued that despite not using the funds all for health care, they were being used to offset other costs like the higher minimum wage, employer tax, and higher rents in San Francisco. But, of course, this is still illegal, and the Board of Supervisors intervened and mostly closed the loophole by requiring restaurants to keep two years worth of healthcare funds (about $8,500) per full-time employee in reserve at all times — and this was followed by a civil grand jury decision last summer which further condemned the restaurants’ practices. The Patxi’s settlement includes $100,000 extra in set-aside funds for the current year.

Herrera now says that he’ll be announcing a “more global” effort to enforce the law across the city, but it seems clear that the Patxi’s case is one that’s meant to scare other restaurants into doing right by the law, or risk big penalties.

Update: Patxi’s CEO Bill Freeman issued a statement clarifying that a) Patxi’s never used the Healthy S.F. funds collected for anything other than employee healthcare, and b) Herrera’s press release unfairly characterizes what happened. He says that an accounting error in 2009 and 2010, before the chain began adding the Healthy S.F. surcharge, led to some negative attention from the city, and they decided to settle the issue rather than spend money on litigation. The statement promises that all unused surcharge funds were set aside for future healthcare costs, and notes that the restaurant no longer even charges the 4% surcharge on customer bills. “We hope this will ease speculation about our intentions and protect our reputation as a community-minded and fair organization that goes above and beyond for our employees.”